I don't necessarily agree that reducing the capacity is "thinking small." I think the trend overall in indoor arenas is smaller and more intimate, both because attendance trends for these events nationwide is going down and because there is more emphasis on creating a better experience for the fan and increasing demand for the tickets. The brand new arena at the University of Oregon only seats a bit over 12,000. (I'll bracket my feelings about the blasphemy of abandoning McArthur Court, which was so fucking badass). You would think that if any school was going to go big or go home on a new basketball arena it would be Oregon, with bottomless pockets and designs on establishing itself as a "big time" athletic program. But they kept it relatively small, with an emphasis on recreating an intimate atmosphere. (Never mind they already had the best, most intimate arena with the most character west of the Mississippi save for maybe Phog Allen, but whatever.)
The AA is a relic of a different time in arena construction philosophy - big, utilitarian, and reflective of a culture when people had less shit to do so you could expect to routinely draw crowds big enough to justify the size. I ranted a while ago about the piss poor attendance for a critical game in a successful season and I stand behind those statements, but at the same time we have to acknowledge that there is all kinds of crap competing for people's attention that didn't exist in the early 80's. Now, I love that place and it is home to my favorite memories attending sporting events, and when you pack them in there is no place like it. But if a meteor leveled the AA tomorrow and we had to hire architects to start over from scratch building a basketball arena, I guarantee that their recommendation would probably be to build something with a max capacity of maybe 10-11k at the most, and our marketing department would hire consultants to discuss ways to enhance the fan experience at games, and I would heartily agree with that.
In 2012, "big time" college athletics does not necessarily correlate with "big arenas." Especially in basketball, when you have a higher volume of games (which reduces scarcity of your product) and a fair amount of them are on weeknights. I think with the way our culture is changing, we have to start being a little progressive in our thinking when it comes to ways to maximizing the attractiveness of the in-game experience.
Consider Gonzaga's arena built in 2004 - they were riding the wave of national popularity based on consistent success, they are located in a metropolitan area with three times the population of Laramie and Cheyenne combined, and you would have to say that they are a "big time" basketball program despite the fact that they play in the WCC. And the new Kennel seats 6,000 (old one sat 4,000, for reference). They sell out every game and would probably do so if that arena were double the size. Food for thought.
There was a Bill Simmons podcast a few months ago when he had the CEO of TicketBastard as his guest, and they discussed this stuff extensively. I recommend a listen.